Pound steady, but credit downgrade threat mean downside risks

Friday 16th March 2012
Good morning. The currency markets have been fairly stable in the last 2 days, with Pound/Euro remaining steady around the €1.20 level. Better than expected unemployment data has given Sterling some support, but threats of a UK credit rating downgrade mean we could see the Pound start to slide again soon. Yesterdays movements:

~Currency Movements on Thursday 15th March 2012~

UK Unemployment

UK unemployment rose by 28,000 to 2.67 million during the three months to January, with the unemployment rate at 8.4%, according to figures from the Office for National Statistics (ONS). The rise in unemployment was the lowest in almost a year.

Despite the high figures, they were actually lower than forecast, and the slowing rise is good news for the Pound, which gained following the release.

UK Credit Rating under threat

The Fitch and also Moody’s credit ratings agencies have put the UK’s top AAA rating on “negative outlook”. Fitch Ratings warned earlier this week that it could downgrade the UK in the next few years if the government does not contain the level of public debt. Last month, another agency Moody’s said it was also watching the UK’s credit worthiness.

The other leading agency, Standard and Poor’s, still has the UK on AAA, with no warning of a possible future downgrade. The move came just a week ahead of Britain’s budget and reinforced expectations that finance minister George Osborne is likely to keep fiscal policy tight to ensure that Britain does not lose its prized top-grade rating.

This news means the Pound may not last long at the current high levels against the Euro. “If you look at the UK on the fiscal side there is relatively little topside potential for sterling and I think all the good news has been priced in terms of fiscal austerity,” said Daragh Maher, currency strategist at HSBC.

US Dollar gains

The dollar has risen against most major currencies this week after the Federal Reserve appeared less dovish than expected at the end of a regular monetary policy meeting, leading to a repricing of interest rate expectations. This has pushed GBP/USD rates down slightly, although we saw a recovery yesterday.

The rise in Treasury yields along with an improvement in U.S. data has supported the U.S. dollar and led to a sell off in the yen, the Swiss franc and higher-yielding currencies like the Australian dollar.

Today’s Data

We end the week with Trade Balance figures from the EU. Inflation data is released from the USA later in the day along with industrial production. There are no releases from the UK today.

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